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De-coding farmer’s balance sheet

Updated: Aug 13, 2019



Budget 2019 presented last week in the parliament brought a relief package to small holder farmers with direct income support of Rs. 6000 per year. This is one of the most awaited announcements, given the current state of farm distress. Government needs to be complemented for its initiatives targeted towards farmer welfare.


However, the challenge continues to be in making Indian farming remunerative to farmers. The lack of predictability in farm incomes and volatility in farm gate prices as seen in last few years is further adding to farmer woes. Farm incomes needs both stability and predictability for farmers to remain invested in the business of farming. Farmer’s balance sheet needs surgical approach to turn it green, which cannot happen without adoption of innovations.

This article attempts at decoding farmer’s balance sheet, cost of capital, P&L account and the role of innovations in improving farmer’s financial health. A disclaimer on the numbers presented in this article – the numbers are “directional” and not accurate to the tee because of lack of adequate number of data points needed for constructing farmer’s financial statements.


A. Constructing farmer’s balance sheet

Farmer is an entrepreneur and farming is an enterprise. Like for any other business enterprise, return on capital employed (ROCE) in farming should be worth farmer’s sweat. A holistic approach for improving farmer’s health requires dual focus on income as well as ROCE from farming business.


It is quite a paradox that there are not enough data points to construct balance sheet for farming as a business activity to calculate ROCE. In the absence of data particularly on the value of fixed and long-term asset (such as land, cattle, agri machinery etc.), a representative balance sheet is attempted on the basis of current assets and current liabilities, not an ideal or accounting-wise correct approach, but good enough to draw key lessons.


Some of the data points are taken from Nabard’s “All India Financial Inclusion Survey -2016-17” (NAFIS) which covered more than 40,000 rural households in 245 districts in 29 states. NAFIS is probably one of the most exhaustive surveys of rural households in the recent times. We need more such surveys for obtaining data on financial health of rural households on a continuous basis. Nabard should be complemented to undertake a survey on this subject at pan-India level.


The survey has useful data points for constructing farmer’s balance sheet and P & L account (with some interpretations and assumptions plugged in). The survey covers both - agricultural and non-agricultural households. For the purpose of constructing farming balance sheet, the data for “agricultural household” is taken into consideration.

The balance sheet for a farmer with one an average ownership of about one hectare of land is represented below taking (only) current assets and current liabilities into consideration.




The striking part of the balance sheet is high leverage (Debt: Equity ratio in excess of ten). High dependence of farmer on debt along with low savings rate (driven by poor profitability) make the balance sheet fragile and at times unsustainable (which lead to need for loan waivers or restructuring). Though direct income transfer of Rs. 6000 per year can moderate D:E ratio in time to come, it will still be very high (around five) from a business sustainability perspective.


Also, interesting to note is that only 53% of households reported to have taken loan as per NAFIS survey. It means balance 47% households either do not need debt or do not have access to debt. There is a high probability that it is more of an access issue reflecting lack of financial inclusion among a large section of farming community.


Only about 10 % agricultural households reported investments in physical and financial assets, implying limited or negative surplus with farmers, leaving little money to invest in productive assets. Limited farmer’s ability to make investment builds a strong case for substantially increasing level of public and private investment in the sector. Current assets figure is derived and it most likely represents inventory of inputs, output and the value of WIP crop in the field.


The balance sheet presented above is for a farmer with about one hectare of landholding. The balance sheet health is likely to be healthier for farmers with larger land holdings and much worse for smaller hand holdings. There are about 70% farmers (approximately 6.5 crores) with less than one-hectare farm and there are about 2 crores tenant farmers in India with no land ownership, so one can imagine the dis-comforting status of balance sheet health of about 8.5 crores farmers (with < 1-hectare land or no land).


B. What is Cost of Capital to farmer?

Like for any other business, it is important to understand the cost of capital in the farming business and whether farmer is making enough profit to beat the cost of capital. The weighted average cost of capital (WACC) in farming business comes out to be 18% with the following assumptions.

Table: Weighted average cost of capital

Its not a surprise that cost of capital for farmer is higher because of higher cost of equity (due to inherent risk including lack of market access, monsoon dependence etc ) and high cost of debt (due to continued dependence on informal credit with steep interest rate -varies from 24 to 48% per year). To beat WACC of 18%, farmer should have ROCE in excess of it, let’s say at least 20%, which however is not the case as we look at the P&L account in the following section.


C. Farmer’s P&L account – how much money does he make?

Farmer P&L account is constructed with data from NAFIS on income and household expenditure. Occupational expenditure is assumed on the conservative side.


It is interesting to note that only about one third of farmer’s income is coming from cultivation and rest is contributed by income from wage labour, livestock, other business and job. With the assumptions tabulated below, for an average of 1-hectare landholding, the return on capital employed is about 11%, much less than cost of capital which is about 18%.


EBIDTA (Earnings before interest, depreciation and tax) is positive, but is not good enough to serve the interest that’s why there is always a concern of default on loan payment. Though, non-institutional debt is unsecured, the lender (usually local money lender) has the first right on sale of farm produce so he is able to recover principal and interest through sale of produce. It is contradictory but true that unsecured loans in farming business seem to be more secure than secured loan from institutional sources.


Table: Farming P&L account for a farmer with farm of about 1 hectare Income

It is a matter for further research on the size of land holding at which ROCE becomes higher than cost of capital. My guess is that inflection point may occur between 3 and 5 hectares. Even if inflection point is at 3 hectares, only about 10% of farming population is likely to have ROCE higher than cost of capital.


D. Improving balance sheet health for a small-holder farmer

The number shared in the financial statement as I said earlier are “directional” which can be debated, challenged and further refined with better availability of data, but the message is clear that farmer’s balance sheet is in deep-red and needs to turn green for agriculture to remain a sustainable occupation. Farmers are not growing food just to feed a billion plus population but to make money to sustain, survive and grow like any other business enterprise. It is paradoxical that on one end, food demand is growing steadily with consumers willing to pay price for good food and on the other end, the producers of food are bleeding with little motivation to continue farming.


How do we solve the problem of this magnitude? For me, the priority areas to improve farmer’s balance sheet health includes the following in the order mentioned below:

- Improve access to intuitional credit

- Enable access to market and diversification of income sources

- Optimisation in cost of inputs

Innovations will play a key role in achieving the above three goals. Let me summarise how innovations can catalyze the above three interventions.


D.1 Access to institutional credit

As discussed above, a significant part of farming community does not have access to credit. About one third of credit (among those who borrowed) continues to be from non-institutional with steep interest rates. Such high interest cost depresses the bottom line and has a negative indirect impact on topline as well since the lenders do not allow farmers to sell farm produce at a time and place to maximize price.


Innovations can go a long way in improving the credit access in the following manner:


I) Building an Agristack:Agristack (https://yourstory.com/2017/12/technology-agriculture/) – which essentially means linking “farm id” to “farmer id”, can be a game changer in improving banker’s access to farmers. Farm id is nothing but the location and size of the farm. Many start-ups including CropIn, Satsure, Agnext, AgRisk, Farmguide, Harvesting have demonstrated success at scale in identifying and marking farm boundaries using satellite imagery, which is necessary to build farm id. However, challenge lie in linking farm id to farmer’s id needs lot of ground truthing effort where I believe government has a key role to play. Agristack will also be key in enabling direct income transfer into farmer’s bank account.


Another option to satellite imagery, is use of drones which can capture much higher resolution of farm images. In my estimate, cost flying drone with cameras to capture images over 200 mn hectares of gross cropped area and processing it, is going to cost about Rs. 3200 crores, which is a small investment, in the context of potential usability of this data by government, bankers, insurers and many other supply chain members.


The priority sector lending target for 2017-18 was about Rs. 11.65 lakh crores (approx. $170 bn). Investment into building an Agristack in context of this target is worth pursuing. It can enable bankers to lend, monitor and democratize the access of credit, particularly to small holder farmers.


II) Linking credit to input sales:Agricultural inputs market (including seeds, fertilizers, agrochemicals and machinery) is worth approx. Rs. two lakh crores (approx. USD 30 bn). Farmer purchase of inputs is a good indicator of his income potential which can be used in building algorithms and credit scoring models for farmers. The input sale data can be captured at point of sale or with assistance of local partners. There are a few start-ups including Jai-Kisan, FarMart and PayAgri who are piloting such solutions.


In my estimate, access to institutional credit has the potential to reduce farmer’s interest burden by Rs. 4000 to 8000 on per hectare basis.


D.2 Access to markets and diversification of income sources

Farming in India is one of the few businesses, where product is being manufactured (as in growing crops) on faith and optimism; not on the basis of nature and pattern of market demand. Till we get to get to a stage of availability of accurate and real-time demand supply data (may be another decade for this to happen at a pan India level), the only other way we can solve demand-supply asymmetry is by having credible and reliable farm produce aggregators to link farmers with markets.


Likes of Ninjacart, Waycool, Kamatan, Crofarm, Loop, DeHaat, Gram Unnati, Agrowave, Farm Taaza, Our Foods, Jumbotail, Superzop, Shopkirana, Krishihub, Krishilok, Freshokartz, Ergos are trying to solve this problem by building tech enabled linkages between farmer and consumer to align supply with demand. Given the stage of development of these new-age supply chain organisers, the volumes are relatively small relative to conventional channels (all farm-to-fork start-ups put together aggregates less than 2000 tonnes per day in a market which is estimates at 1.5 million tonnes per day at pan India level for fresh produce and staples). However, even at the current rate, it is evidenced that farmers benefit in terms of better and more predictable prices in closed-loop models. Farmers have reported increase in income by 20 to 50% while working with these start-ups, which means additional Rs. 5000 to 15,000 in farmer’s pocket. Also, market inclusion can play a pivotal role in driving financial inclusion as bankers can draw comfort with buyback arrangements are in place before lending. Samunnati Finance – one of the most successful NBFCs in the agricultural space – has built its loan book by enabling financial inclusion through establishing market linkages.


These start-ups are trying to organize fresh produce and staples supply chain, similar to what Amul and NDDB did in last few decades in organizing milk supply chain. While milk cooperatives had government support, these start-ups lack that kind of support. One-way government can play a catalytic role in driving organization of supply chain is by accelerating the scaling of Farmer Produce Organisations (FPOs). Theoretically, India needs about 200,000 FPOs (assuming membership of 700 farmers per FPO and 14 crores total number of farmers) to organize the entire farming community. We have only about 3000 FPOs with only some of them operational on the ground. Another big advantage of FPOs is that it can also bring many tenant farmers into formal credit structure, which they are deprived of because of lack of land ownership.


Diversification of income source also needs to be targeted to boost as well as derisk farmer’s revenue. Indian farmers have been able to survive in last few decades on the back of three decisive movements -green, white and horticultural revolution. Dairy and horticultural are two biggest diversification Indian agriculture has seen in the past few decades which not only helped farmer to earn more but also improve his working capital cycle (both milk and vegetables can be sold on daily basis unlike field crops).


What next? – there are plenty of diversification opportunities for farmers like beekeeping, sericulture, aquaculture, herbs, silage production etc, which are waiting to happen at scale. Each of these opportunities is worth billions of dollars. Growth of poultry (both broiler and layer) in the last decade or so has demonstrated that farmers are open to diversification into newer areas. My guess is that diversification into newer areas will be driven by market players willing to backward integrate (as demonstrated in poultry by Suguna, Venky’s, Godrej). Diversification of income sources can help farmer earn a few thousand rupees extra and further reduce his dependence on cultivation income.


D.3 Optimisation of farm input applications

The current input applications by farmers needs to become more scientific. For example, flood irrigation is the norm in most irrigates areas because majority of farmers do not measure soil moisture and hence end up feeding crops with more water than needed. Similarly, in many places, urea application is disproportionately higher and much more relative to other vital nutrients (Urea continue to be out of Nutrient Based Subsidy – hence relatively cheaper than other fertilisers on per unit basis). Measurement of soil nutrition is needed to correct sub-optimal applications of fertilisers, which is so critical for improving soil health.


Many start-ups who are building factory-to-farm models for input sale such as Agrostar, BigHaat, Unnati, Gramophone, Behtar Zindagi, Agroy, Salesbee are integrating advisory services for customized applications of inputs with the help of technology. Technology is evolving fast for real-time and affordable measurement of soil moisture, pH, nutrients, local weather parameters, early detection of pest attack etc.


It is now possible to templatize the data collection and reporting formats on the status of soil/crop/weather so as to develop customized input application plan for each farm. Scientific, data driven customized application of inputs can reduce cost by 10 to 30%. This can result into saving of about Rs. 2000 to 5000 per hectare.


E. Conclusion

The objective of this article is not to be conclusive but build a discussion platform on possible ways for integrating innovations in Indian farming to improve farmer’s balance sheet. Three interventions discussed in the article can potentially benefit farmer with a surplus in the range Rs. 15,000 to 30,000 on per hectare per year basis; which is a handsome amount to address financial distress.


In addition to focus on improving farmer’s income; we also need to work towards improving ROCE to at least 20% and simultaneously bring down cost of capital to single digit for farming business. The improvement in health of farmer’s balance sheet is critical to keep farmer motivated to pursue agriculture as business enterprise.


Innovations in output, input and data anchored by digital-tech is the way forward to make this happen. Fortunately, we are blessed to have about 1000 plus agritech start-ups now in the country and quite a few committed investors who can drive scaling of new-age solutions. Progressive and long-term policy framework from the government can further accelerate integration of innovations in supply chain. A partnership approach between start-ups, banks and government is needed to build innovative solutions for a healthier and sustainable farming balance sheet for the benefit of farmer.


This article also featured on Yourstory



Apart from being the co-founder and director of ThinkAg, Hemendrais working as Venture Partner with Bharat Innovations Fund. He has over 20 years of experience in venture capital, private equity, management consulting and investment banking. Hemendrahas significant investing experience across sectors in the agricultural and food supply chain. Hemendrain his career has worked with SEAF, Yes Bank, Rabobank, KSA Technopak, and ORG MARG (Nielsen). He is a management graduate from IIM (Ahmedabad) and Agricultural Engineer from Rajasthan Agricultural University.

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